Equity Linked Savings Schemes – Saving Taxes and Beyond

by Salil Dhawan ·
Published October 14, 2018
· Updated October 15, 2018

As you spend more and more years in equity markets, there’s lots and lots of learnings which you as an equity investor have up your sleeve. For each first profit or loss you made, for every moment when the market surprised you on the way up or on the way down, for each stock which betrayed your investment thesis behind it, for every unexpected stock which performed exceedingly well and gave you multi-fold returns, for every stock which rallied or tanked just after you sold it, for every stock which you invested based on your friend recommendation and lost big time, for every consistent mutual fund you invested in year or year via SIP or for every fund which was a dud and didn’t perform even in rising market – there’s a learning. It is true that equity investing (especially direct equity investing) is not that simple, especially in severe market downturns when everyone runs for cover and there’s pessimism all around.

It is also true that until you have not invested your own money in equity markets, it is hard to understand the mixed emotions an equity investor goes through. For a retail investor is it best to ignore daily trading calls on business channels and invest in direct businesses with excellent and progressive management, sector leaders, clean balance sheet to begin with. If direct equity investing is not for you, look for good consistent mutual funds which have delivered across all market cycles.

With an unlimited access to so many stocks, mutual fund, and personal finance websites and respective recommendations, for a retail investor, it is an uphill task, especially for an inexperienced, novice first-time investor. On top of this, there are always advisors out there looking for scapegoats to sell their high commission traditional insurance policies which do more harm than good to the finances of an investor. In fact, you bought the policy do a world of good to their commission payout. In addition, with so many stocks and mutual fund schemes out there, it is very difficult for an investor to decide where to start – direct equity or mutual fund investing or debt instruments only or traditional insurance and retirement plans. Moreover, investor’s investments must be based on one’s risk profile, investment horizon, each financial goal corpus target etc. Where should one start with then?

What we all have in common is the first job or our own family business we first join. A first paycheck, exciting times, buying of new gadgets/bikes/shopping etc. and few months down the line we start looking out for prospective investments, primarily with the sole aim to save tax. This is a crucial juncture (most of us realize it a decade down the line), not from the perspective of how much you are looking to invest (since amount will be relatively small) but what first investment you choose to start your journey towards financial independence. This first investment lays the path for your future investments. This is the time when many of young investors end up investing in traditional insurance policies, endowment plans (falls prey to tax saving carrot) which eventually drains out a large sum of investible surplus in the initial years which in fact is the best time to invest (with almost no responsibilities). On the debt side, Public Provident Fund (PPF) becomes the obvious choice for most investors, following family traditions. Tax saving FD’s are also a hit among first-time investors.

For any young investors reading this write-up, please do your due diligence before making your first investment decision. Do make sure you must do your homework before investing and invest in products which will pay you rich dividends 10-20 year down the line. Invest in products which are simple to understand and are effective. If your advisor is selling you a particular product, do your research and ask questions (really hard questions). Don’t be shy which sometimes youngsters are. Go in the depth.

Today with our readers, we are sharing one such investment option which has generated huge wealth for investors over a long-term (provided they have taken the SIP route and invested month on month) and not just saved tax year on year. New first time investors must consider this investment option and think beyond how this investment product has a potential to generate huge wealth for the investors over a long term. Though we have written about Equity Linked Saving Scheme (ELSS) as an investment option earlier also but there’s no harm reiterating it once again. All the information about ELSS funds you can find here. This can be one investment which you start with your first job and can give you sizable retirement corpus once you retire. Of course, this will depend on the funds you choose, investment amount per month and how you scale it up as your salary increases, your investment time frame, how funds fare over time, any redemptions of SIP discontinuation done midway by you as an investor etc.

ELSS funds, as the related articles point out are a great way to create wealth. Historically speaking, some of the ELSS funds from reputed fund houses having generated phenomenal returns for investors over a 15-20 year period. Why you need anything else? Though past performance doesn’t in any way guarantee future returns if you look at some of the credible ELSS funds, they have been a treat for investors who understand how big an opportunity they present for you as an investor. SIP investments can be started with as low as Rs. 500/-. Having talked with a lot of investors, they have 2 main reservations when it comes to ELSS – (1) Lock-in of three years, (2) ELSS being an equity-related product.

As regards, ELSS being an equity product, truly it is and since you are young and have a long-term investment horizon, ELSS funds very much fit the bill. Equity is all about the power of compounding which helps you generate phenomenal returns over a long time. As regards lock-in of three years, again equity investment is for the long-term and should not be a deterrent for you to invest in this product. In fact, such a lock-in helps you as an investor not to panic in market downturns and initiate redemptions.

Some of the ELSS funds, if you go through have generated excellent long-term returns over a long period of time. So make sure you don’t downplay their role in your overall financial portfolio. They are here for a purpose and fulfill more purpose than merely tax saving. Do also remember, all ELSS funds are not the same. Few have large cap focus, while some do venture into the mid-cap category. So invest as per your risk profile. Don’t invest in more than 1-2 ELSS funds and prefer SIP route right from April of the financial year. Avoid investing a lump sum amount in these funds at the end of the financial year. Continuing with your ELSS SIP’s even when you have home loan principal to show for tax deductions under 80C is not a bad idea. Why will you kill your compounding in a good ELSS fund in such a case? Of course, many do argue about the mandatory lock-in but still, it should be ok with a pure equity product.

If we take an HDFC Tax Saver Fund-Regular Plan (Growth) (not a recommendation) example, a 5000/- SIP from Oct 01, 1999 to October 01, 2018 would have fetched you a handsome 19.76% CAGR return (pre-tax) with investment value 1,145,000.00/- fetching you handsome 9,998,754.58 (pre-tax). Some of the other ELSS funds such as ABSL Tax Relief 96 or a Reliance Tax Saver or an Axis Long Term Equity have rewarded investors handsomely over the years.

As an investor, what else can you vouch for? Just maintaining consistency of investment all through these ups and downs of the market. Keeping your composure is the key (easier said than done) and the persistence of investing month on the month will definitely give you rich dividends in the long run. 10-15 years down the line, you will feel proud of this investment decision. Since this is your first investment, it will be with you for the longest possible time and hence maximum is the compounding impact.

Do consider investments in ELSS funds if you haven’t till date.

Disclaimer: The write-up is for information purpose only and is not a recommendation of any sort to the readers. Mutual funds are subject to market risks. Please consult your financial advisor before taking any financial decisions. The author is investing in ELSS funds via SIP mode.

To invest in mutual funds, send an email to dhawansalil@gmail.com and we will get back to you.